Question 1

I am a small business. Can the small-business bankruptcy laws help me?

Accepted Answer

Bankruptcy should be the last resort for any business debtor.  Bankruptcy can be expensive and places the future of your business and your control of that business at risk.  Best practice is to work out an agreed restructuring plan and payment plan with your creditors.  If you are unable to pay your debts as they become due, unable to devise a restructuring plan for your business and work out a payment plan with your creditors, or you face litigation from your creditors, then you should consider bankruptcy as an alternative.  Bankruptcy allows you to temporarily halt claims against you including any pending litigation, provides time for you to devise a plan to restructure your business, and work out a payment plan with your creditors.  You should seek professional counsel of an attorney and/or business restructuring expert before considering bankruptcy.  And, they can explore your restructuring and bankruptcy alternatives.

Question 2

What are the benefits/hazards of the small business bankruptcy statute?

Accepted Answer

Chapter 11 allows for business restructuring.  There is a short form alternative of restructuring for small businesses. The Small Business Reorganization Act of 2019 (SBRA) went into effect in  early 2020, and generally applies to businesses with up to $2,725,635 in debt. The CARES Act, enacted on March 27, 2020, temporarily expanded this debt limit to $7,500,000 for all small business debtors for a period of one year, as part of Covid relief.  There are important differences between the type of restructuring relief available to a debtor under Chapter 11 and under the SBRA.  Chapter 11 offers more flexible restructuring opportunities, however, because it allows for potentially greater flexibility in structuring a business plan subject to creditor approval.  Under the SBRA the only plan that is permissible is a plan that commits all the net disposable income generated by the business to the creditors for repayment under a plan for a period of 3 to 5 years. While this allows for streamlined restructuring, it does limit the upside for the duration of the plan for equity holders of the business.

Question 3

What are the costs of a small business bankruptcy?

Accepted Answer

In general, the administrative costs of any bankruptcy are material. However, the costs of small business bankruptcy under SBRA are less than a typical bankruptcy in several particulars.  Creditors’ committees are not required, which means that unlike an ordinary Chapter 11 restructuring, the debtor does not have to finance the cost of the creditors and their attorneys in negotiating and responding to a plan.  Further, a standing trustee is appointed that assists debtors in formulating a plan.  Finally, the costs of counsel are reduced because the procedures for obtaining plan approval are more streamlined.  You should consult experienced counsel before electing bankruptcy and choosing alternatives.

Question 4

What are our options as a "creditor" when a small business is late in making payments owed to us?"

Accepted Answer

If a vendor or other company owes you money, you - as a "creditor" - should engage with that company (the "debtor") at the earliest opportunity to begin discussions aimed at resolving unpaid claims or disputes. Ultimately, if a debtor is unable to pay its debts as they become due, or otherwise insolvent, some form of formal restructuring or liquidation is going to be necessary.  Early engagement will enable creditors to identify their options and evaluate their collection risks.  Also, for many creditors one option is to sell their claims to funds that specialize in acquiring them and will assume some of the restructuring risk in exchange for potential upsides.

Question 5

I am a victim of a Ponzi scheme? What are my rights? Options?

Accepted Answer

If you believe you are a victim of a Ponzi scheme, report your suspicions to the SEC, CFTC, the Department of Justice or your state law enforcement authorities. Where possible, the government will investigate and intervene in the event a Ponzi scheme is in fact uncovered.  Where practical, the government agencies often seek the appointment of a receiver for the benefit of creditors. When criminal misconduct has occurred, the DOJ will also seek to establish restitution funds for the benefit of victims out of recovered assets.  In either circumstance, victims have rights to be heard and to notice of the proceedings, giving them the opportunity to protect their rights.  In the absence of government intervention, victims have the right to collective action that can achieve similar results.

Question 6

I am a creditor who received payments from the debtor in the ordinary course of business; but a bankruptcy trustee demands repayment. What are my rights?

Accepted Answer

In the event that you receive a demand letter from a bankruptcy trustee, you should consult experienced counsel to determine your rights.  The law requires a creditor to repay what are termed preference payments made within 90 days of a bankruptcy, subject to certain important defenses and exceptions.  Likewise, if you receive a demand from a trustee to return alleged fraudulent transfers, there are important defenses available to good faith creditors.  Consultation with counsel is critical for you to evaluate your options and risks.

Question 7

Does the government help victims of frauds?

Accepted Answer

All federal and state agencies have complaint hotlines to report possible fraud or wrongdoing.  The government has mechanisms to help victims of fraud.  Both the Department of Justice and state and federal regulatory agencies make it a priority to provide restitution to victims when possible.  This is typically done through the vehicle of restitution funds where the government collects funds from wrongdoers that are distributed to victims in accordance with court supervised plans of distribution.  Victims have rights to be heard as part of this process.  But the government does not have the resources to investigate or intervene in every potential fraud situation.  You should consult experienced counsel to explore options where the government is unable to, or declines to intervene.

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